For many of our clients, a pension is a great way to be tax efficient. In fact, there are way more advantages than most people realise. At re:accounts minimising your tax liability is our superpower – especially if international tax is involved. Pensions are a definite consideration for anyone looking to make the most of tax benefits available. Here are seven reasons why:
1. Free cash!
Tax relief is an instant boost to your pension pot, involving an automatic increase of 20% (or 40% / 45% for higher rate / additional rate taxpayers). This is put in place via your self-assessment tax return each year, or your workplace pension scheme. This is the government’s way of encouraging us to contribute more to our pensions!
2. Investment growth
Thanks to the tax treatment of pension funds, your pension value is likely o to grow faster than investment funds. Plus, investment funds are taxable. Contributions to your pension scheme mostly grow free of tax.
3. Tax band efficiency
If your earnings take you close to the threshold of the next tax band, ‘salary sacrifice’ can prevent you from paying additional tax. This involves increasing pension contributions instead of your basic salary. Food for thought!
4. Earnings and allowances
Contributions to your private pension are tax-free to a maximum of 100% of your earnings during a tax year. In addition, for most people the total sum of personal contributions, employer contributions and government tax relief received can’t exceed the annual personal allowance of £40,000 (2021/22). More complex rules apply for the very highest earners under a tapering allowance that can reduce the annual allowance to as little as £4,000.
5. ‘Carry forward’ option
Remembering that your tax-free contribution is limited to 100% of your salary or £40,000, unused allowances from up to the previous three tax years can be used in the current year. This is an attractive option if your salary has risen significantly in the current year.
6. Pension beneficiaries
Prior to your 75th birthday your pension can be passed on tax-free. Your beneficiaries can spend it within two years without incurring a tax bill, regardless of their age. After your 75th birthday, there can be tax implications, although this may still be more tax efficient than money outside of a pension.
7. Pension access, tax-free
The major drawback of pensions for some savers is that the money is locked away once committed. However up to 25% of your pot can be accessed tax free – with the remaining 75% available as taxable income – from private pension access age. That is currently 55 years, increasing to 57 years from 2028.
“Pensions offer a range of tax benefits,” says Emily Bridges of re:accounts in Stevenage. “By looking at the allowances and options available, there are usually savings to be gained. It makes sense to optimise the chance to reduce your tax liability.”
Would you like to explore how a pension can reduce your tax liability?
Contact the friendly experts at re:accounts. We love talking about numbers and saving tax … it’s the perfect combination … especially over a cuppa!
